Surcharge can help cushion shippers from burden of cleaner fuel costs

Cleaner marine fuels with lower sulfur content will push up the operating costs of shipowners but geographical consistency in fuel specifications can help them push for a surcharge while negotiating freight with charterers, a senior shipping industry official said.

“A uniform cap on sulfur content in marine fuels in both mainland China and Hong Kong will enable shipowners to push for a fuel surcharge,” Arthur Bowring, managing director of the Hong Kong Shipowners Association told S&P Global Platts on the sidelines of the Singapore International Bunkering Conference.

Bunker fuel with 0.5% sulfur content commands a premium to that with 3.5% sulfur, he said.

The Hong Kong Shipowners Association is one of the largest of its kind and its members own and operate a fleet with a combined carrying capacity of more than 100 million dwt.

“Reducing harmful emissions might add to the burden of shipowners especially in these difficult times,” Bowring said with reference to the current low freight rates.

In the past, shipowners have tackled high costs during a time of economic slowdown and low freight rates through slow steaming, laying off ships and avoiding longer voyages.

“Owners have the choice to conduct their business at any rate of return they aim at or even at the least loss possible,” Bowring said on the prospects of using cleaner but costlier bunker fuel during a time of low freight rates. If all ports implement similar norms on fuel specifications, carriers have the opportunity to pass on the costs to the charterers.

In little over one year, when all the ports within designated Chinese domestic ECAs implement cleaner fuel use norms, it will provide a level playing field to all shipowners operating in the region, he said.

Bowring cited the example of Hong Kong where 18 shipping companies voluntarily opted for costlier but cleaner bunker fuel as early as 2010, putting them at a cost disadvantage to the rest but the legislation making it mandatory for all was implemented from July last year. Currently, Hong Kong has its own rules governing bunker fuel emissions under which the maximum sulfur content permissible when berthed at ports is 0.5%.

On the other hand, China has designated only a few ports, where the same cap will be implemented. Shanghai adopted the norms in April, Shenzhen from this month and nine more key ports will do so from January next year.

The first hour after arrival and the last hour before departure are exempted from the new rules.

This limits the volumes of cleaner bunker fuel being consumed at present but with the passage of time as more ports are brought into the fold of the new regulations, demand will increase, Bowring said.

It also implies that shipowners have to maintain three different types of fuel in segregated tanks to comply with different norms worldwide.

While bunker fuel with up to 3.5% sulfur can be burnt globally, there are established emission control areas, or ECAs in the Baltic Sea, the North Sea, the US, Canada and the Caribbean where a restriction of 0.1% was implemented last year.

To avoid maintaining three sets of marine fuel on ships, many owners are already using bunker fuel with 0.1% sulfur content even when berthed in Hong Kong, Bowring said.

The premium enjoyed by bunker fuel with 0.1% sulfur over 0.5% is relatively small compared with the premium for the 0.5% grade to 3.5% sulfur fuel, he said.

Not only was it costlier to maintain different grades of fuels in ship tanks, there was also the risk of an accident when changing fuel on the high seas, he added.

Demand for such fuels will increase once China expands the ambit of its emission control regulations to all ports within the designated ECAs from 2018. These include ports on the Pearl River Delta, Yangtze River Delta and the Bohai rim waters.

There is also a proposal from the International Maritime Organization to cut the global cap on sulfur content in marine fuels to 0.5% by 2020 from 3.5% currently.

Bowring said that it was not possible to implement the cleaner marine fuel norms in a comprehensive ECA around Hong Kong instead of only at berth because many ships pass through the region to mainland Chinese ports which are not governed by these rules. From 2019, however, the regulations were likely to be extended to the entire domestic China ECAs, he added.

Hong Kong is also working on its own legislation to meet the 0.5% sulfur norm for all Chinese domestic ECAs by January 1, 2019.

ECAs typically create a situation where people in some regions have stricter environmental standards while a global norm would rectify that, he said.